Arthur v. State, Department of Hawaiian Home Lands. , 138 Haw. 85 ( 2016 )

*** FOR PUBLICATION IN WEST’S HAWAIʻI REPORTS AND PACIFIC REPORTER ***
Electronically Filed
Supreme Court
SCWC-13-0000531
27-JUN-2016
12:52 PM
IN THE SUPREME COURT OF THE STATE OF HAWAIʻI
---oOo---
________________________________________________________________
WILLIAM A. ARTHUR, SR., Individually, and
THE ESTATE OF MONA ARTHUR thru William A. Arthur, Sr.
as the Personal Representative,
Respondents/Plaintiffs/Appellants/Cross-Appellees,
vs.
STATE OF HAWAII, DEPARTMENT OF HAWAIIAN HOME LANDS;
KAMEHAMEHA INVESTMENT CORPORATION; DESIGN PARTNERS INC.,
Respondents/Defendants/Appellees/Cross-Appellees,
and
COASTAL CONSTRUCTION CO., INC.;
SATO AND ASSOCIATES, INC.; and DANIEL S. MIYASATO,
Petitioners/Defendants/Appellees/Cross-Appellants,
____________________
KAMEHAMEHA INVESTMENT CORPORATION,
Respondent/Third-Party Plaintiff/Appellee/Cross-Appellee,
vs.
KIEWIT PACIFIC CO.,
Respondent/Third-Party Defendant/Appellee/Cross-Appellee
____________________
KIEWIT PACIFIC CO.,
Respondent/Fourth-Party Plaintiff/Appellee/Cross-Appellee,
vs.
PACIFIC FENCE, INC.,
Respondent/Fourth-Party Defendant/Appellee/Cross-Appellee.
________________________________________________________________
SCWC-13-0000531
CERTIORARI TO THE INTERMEDIATE COURT OF APPEALS
(CAAP-13-0000531; CIVIL NO. 05-1-1981-11)
JUNE 27, 2016
RECTENWALD, C.J., McKENNA, POLLACK, WILSON, JJ., AND CIRCUIT
COURT JUDGE BROWNING, IN PLACE OF NAKAYAMA, J., RECUSED
OPINION OF THE COURT BY McKENNA, J.
I. Introduction
This case is a contract dispute between Petitioners/
Defendants/Appellees/Cross-Appellants Sato and Associates, Inc.
and Daniel S. Miyasato (collectively, “Sato” or “Engineer”), and
Respondent/Defendant/Appellee/Cross-Appellee Kamehameha
Investment Corporation (“KIC” or “Developer”). Sato timely
applied for writ of certiorari (“Application”) on August 7, 2015
from a June 8, 2015 Judgment entered by the Intermediate Court
of Appeals (“ICA”) pursuant to its February 27, 2015 Opinion
(“Opinion”). In relevant part, the ICA affirmed the Circuit
Court of the First Circuit’s (“circuit court[’s]”) “Order
Granting Defendant and Third-Party Plaintiff Kamehameha
Investment Corporation’s Motion for Partial Summary Judgment
Against Defendant Sato & Associates, Inc. . . .” filed May 27,
2
2011. Heavily relying on Pancakes of Hawaii, Inc. v. Pomare
Properties Corp., 85 Hawaii 286, 944 P.2d 83 (App. 1997), the
ICA concluded that pursuant to the Project Consultant Agreement
(“Agreement”) between Sato and KIC, Sato had a duty to defend
KIC in the wrongful death action brought by Respondents/
Plaintiffs/Appellants/Cross-Appellees, William A. Arthur, Sr.
(“William”) and the Estate of Mona Arthur (collectively,
“Arthurs”) upon KIC’s tender of defense to Sato. See Arthur v.
State, Dep’t of Hawaiian Home Lands, 135 Hawaii 149, 171, 346
P.3d 218, 241 (App. 2015).
In its Application, Sato presented two questions:
1) Was Pancakes wrongly decided?
2) In applying Pancakes, did the ICA fail to strictly
construe the indemnity contracts at issue by treating
Sato and other contractual indemnitors as insurers and
the subject indemnity contracts as insurance policies?
(formatting added). KIC opposed the Application, whereas
Coastal Construction Co., Inc. (“Coastal”), a co-defendant in
the Arthurs’ suit, filed a response in support of the
Application.
The Application was accepted on September 18, 2015.
This court requested supplemental briefing from the parties
addressing the following:
(1) Is the duty to defend presented in Sato’s non-
insurance, construction contract with KIC coextensive with
Sato’s duty to indemnify?
(2) Given case law and legislative history, does Hawaii
Revised Statutes [(“HRS”)] § 431:10-222 (2005), render void
3
any provision in a construction contract requiring the
promisor to defend “the promisee against liability for
bodily injury to persons or damage to property caused by or
resulting from the sole negligence or wilful misconduct of
the promisee, the promisee’s agents or employees, or
indemnitee?”
Upon considering the parties’ briefs, oral arguments,
and the relevant law, we hold as follows:
(1) HRS § 431:10-222 renders invalid any provision in a
construction contract requiring the promisor to defend
“the promisee against liability for bodily injury to
persons or damage to property caused by or resulting
from the sole negligence or wilful misconduct of the
promisee, the promisee’s agents or employees, or
indemnitee”;
(2) Pancakes, 85 Hawaii 286, 944 P.2d 83 (App. 1997), does
not apply to defense provisions in construction
contracts; and
(3) the scope of a promisor’s duty to defend that is
imposed by a construction contract is determined at
the end of litigation.
II. Background
A. The Arthurs’ Wrongful Death Action
Mona Arthur (“Mona”) and her husband, William, lived
on property in the Kalawahine Streamside Housing Development
(“Project”) under an Assignment of Lease and Consent they
executed with the Department of Hawaiian Home Lands (“DHHL”) on
4
October 31, 2000. They typically gardened on the hillside
behind their home about three times a week. To access the
hillside, the Arthurs crossed a concrete drainage ditch and
climbed over a two-foot-high chain link fence. Mona wore
sneakers with snow spikes to prevent her from sliding down the
hill.
On November 10, 2003, Mona and William gardened on the
hillside. William left Mona’s side for a few minutes to get
some water for Mona, and when he returned, he found her lying in
the concrete ditch. No one witnessed how Mona came to be in the
ditch. Mona suffered severe head injuries, fell into a coma,
and died on March 9, 2004.
The Arthurs subsequently filed suit for Mona’s
wrongful death on November 4, 2005. Their First Amended
Complaint, filed November 8, 2005, alleged that Mona, while
gardening on the hillside, “slipped and fell, rolled down the
slope of the hillside over a fence, fell into the drainage
embankment and hit her head against the concrete walling. . . .
[Mona] . . . sustained injuries such that she was in a coma
until her death . . . .” The Arthurs asserted Mona’s injuries
and death were due to the negligence of DHHL, KIC (as the
developer), Design Partners, Inc. (“Design Partners”) (as the
architect), Coastal (as the general contractor), Sato (as the
5
civil engineer), and other “Does”; and that that negligence was
composed of, but was not limited to, the following:
a. Negligent design of the hillside area, including the
fence and culvert;
b. Negligent construction of the hillside area, including
the fence and culvert;
c. Negligent supervision of the construction of the
1
hillside area, including the fence and culvert.[ ]
These claims were unaltered in the Arthurs’
Second Amended Complaint, filed December 3, 2009. [95:315]
The Second Amended Complaint differed from the first
primarily due to the addition of the following allegations,
which asserted a punitive damages claim against KIC:
20. ELTON WONG was the project manager for [KIC].
21. At all times relevant, WONG was acting within the
scope of his employment with [KIC].
22. ELTON WONG, ordered [Sato] to lower the chain link
fence guarding the concrete drainage ditch from 4 feet to 2
feet.
23. The lowering of the fence reduced the construction
costs and thereby increased Defendant’s profits.
24. ELTON WONG, in his own handwriting, directed that
the chain link fence be looked at for “value engineering”.
25. ELTON WONG knew that the fence was intended to
protect persons from falling into the drainage culvert.
26. ELTON WONG specifically met MONA ARTHUR at least 20
times and knew that she was going onto the steep
hillside[.]
27. If ELTON WONG had allowed the fence to remain 4 feet
high, MONA ARTHUR would not have been fatally injured;
because of her lower center of gravity, a 4 foot high fence
would have prevented MONA ARTHUR, who was 5’4” in height,
from falling into the drainage ditch.
27.[sic] Instead of maintaining the safety of a 4 foot
high fence, ELTON WONG ordered the fence lowered to 2 feet.
He ordered the fence lowered simply to increase the
1
The Arthurs also separately alleged the Association of Kalawahine
Streamside Association (“AOAO”) “was negligent with respect to the above
including, but not limited to negligent inspection, maintenance and warning
regarding the hillside area, including the fence and culvert.”
6
Defendants [sic] profits, without consideration to the
safety of persons such as MONA ARTHUR. He reduced the
height of the fence knowing that residents, such as MONA
ARTHUR, were required to maintain the steep hillside.
28. [KIC]’s overriding concern was for a minimum-expense
operation, regardless of the peril involved.
29. [KIC] acted wantonly or oppressively or with such
malice as implies a spirit of mischief or criminal
indifference to civil obligations.
30. [KIC]’s conduct constituted wilful misconduct or an
entire want of care which would raise the presumption of a
2
conscious indifference to consequences.[ ]
B. KIC’s Tenders of Defense against the Arthurs’ Claims
Pursuant to the Hold Harmless Clauses in Its Agreements
with Parties Involved in the Project’s Construction
A March 10, 1998 Project Consultant Agreement
(“Agreement” or “Contract”) between KIC and Sato with respect to
the Project described Sato’s “scope of work” to involve
preparing, among other things, grading and drainage plans,
electric and telephone plans, and sitework civil drawings for
various permit applications as necessary. The Agreement also
contained a paragraph titled, “Indemnity by Consultant,” which
stated:
Consultant [Engineer] hereby agrees to indemnify, defend
and hold harmless Developer, and each of its officers,
directors and employees, from and against any and all
claims, demands, losses, liabilities, actions, lawsuits,
proceedings, judgments, awards, costs and expenses
(including reasonable attorneys’ fees), arising directly or
indirectly, in whole or in part, out of work undertaken by
Consultant [Engineer] outside the scope of this Agreement
and/or out of the negligence or any willful act or omission
of Consultant [Engineer], or any of its officers,
directors, agents or employees, in connection with this
Agreement or Consultant’s [Engineer’s] services or work
hereunder, whether within or beyond the scope of its duties
or authority hereunder. The provisions of this Section
2
Partial summary judgment was later granted in KIC’s favor with respect to
the punitive damages claim. See infra Part II.C.
7
shall survive completion of Consultant’s [Engineer’s]
services hereunder and/or the termination of this
Agreement.
(“Hold Harmless Clause”). KIC’s contracts with Design Partners,
Coastal, and the general contractor for grading and site work,
Kiewit Pacific Co. (“Kiewit”), each contained indemnity
language, similar to that in the Hold Harmless Clause, requiring
the subcontractor to “indemnify, defend, and hold harmless” KIC.
Kiewit’s contract with Pacific Fence, Inc. (“Pacific Fence”) to
construct a debris fence between the constructed homes and the
adjacent hillside also contained language requiring Pacific
Fence to indemnify and defend Kiewit.
By a letter dated December 15, 2005, KIC tendered its
defense against the Arthurs’ claims to Sato, pursuant to the
Hold Harmless Clause. Although Kiewit was not named in the
First Amended Complaint, based on its agreement with Developer,
KIC also tendered its defense to Kiewit through KIC’s attorney,
Brad S. Petrus, by letter dated December 1, 2005.
On December 21, 2005, KIC then filed a third-party
complaint against Kiewit, seeking, among other things, a
declaration that Kiewit owed a duty to defend and indemnify KIC
pursuant to their contract. KIC also filed cross-claims against
Sato, Design Partners, and Coastal, alleging, among other
things, that each party, pursuant to respective contracts,
8
“agreed to defend and indemnify” KIC against allegations such as
those made by the Arthurs.
On January 31, 2006, Kiewit filed a fourth-party
complaint against Pacific Fence, alleging, among other things,
that Kiewit was contractually “entitled to an immediate defense
and full indemnification from Pacific Fence” with respect to
KIC’s third-party complaint against Kiewit. By letter dated
February 9, 2006, Kiewit tendered its defense to Pacific Fence.
Also on February 9, 2006, KIC filed a cross-claim
against Pacific Fence, asserting, among other things, that by
way of Pacific Fence’s contract with Kiewit (and Kiewit’s
contract with KIC), that Pacific Fence agreed to defend and
indemnify KIC against claims such as the ones brought by the
Arthurs. KIC sought a declaration that “Pacific Fence owes a
joint and several duty to defend . . . KIC” against the Arthurs’
claims. KIC’s February 9 filing was later construed by the
circuit court to be KIC’s tender of its defense to Pacific
Fence.
Concurrent with KIC’s filings and requests for defense
and indemnity, DHHL filed a cross-claim on January 12, 2006
against KIC, Design Partners, Coastal, AOAO, and Sato, alleging,
among other things, that the State was “entitled to defense,
indemnification, contribution, subrogation and/or reimbursement
from one or more Cross-claim Defendants.” By letter dated March
9
6, 2006, DHHL tendered its defense to KIC. In turn, KIC
tendered the defense of DHHL to Kiewit. Kiewit then tendered
that defense to Pacific Fence.
By letters dated May 4, 2006 and July 26, 2006, Island
Insurance Co., Pacific Fence’s insurer, agreed to provide a
defense to KIC, Kiewit, and DHHL.
According to KIC’s attorney, by separate letters dated
April 24, 2006, Sato and Kiewit agreed to participate on a pro-
rata basis in KIC’s defense subject to several conditions.
C. Circuit Court Proceedings with Respect to the Parties’
Duties to Defend
Numerous motions were heard by the circuit court
regarding the merits of the Arthurs’ claims and the parties’
respective contractual duties to defend. A summary of motions
relevant to this appeal follows.
In September 2009, upon the available evidence after a
lengthy period of discovery, Coastal filed a renewed motion for
summary judgment based on the fact that its work did not extend
beyond the individual dwellings in the Project; i.e., did not
include the hillside, fence, or culvert. In February 2010, the
circuit court ruled on Coastal’s Motion: (1) summary judgment
was granted in favor of Coastal and against the Arthurs with
respect to claims raised in the First Amended Complaint or the
Second Amended Complaint; (2) partial summary judgment was
10
granted in favor of KIC and against any other party on claims
“arising out of, resulting from, attributed to, connected with,
or otherwise premised upon the work contracted to and/or
performed by . . . Coastal”; and (3) any duty of Coastal’s to
defend KIC did not extend beyond February 25, 2010, the date of
entry of the Order.
On March 2, 2010, KIC filed a “Motion for Partial
Summary Judgment as to Plaintiffs’ Claim for Punitive Damages
[in its Second Amended Complaint],” arguing that even if the
decision to lower the fence from 4 feet to 2 feet was “motivated
by a desire to cut costs and boost profits,” that was
insufficient as a matter of law to prove the requisite elements
justifying punitive damages. The circuit court granted KIC’s
Motion on May 24, 2010.
On May 6, 2010, Pacific Fence filed a Motion for
Partial Summary Judgment, arguing that there was no question of
fact that in installing the fence in the Project, Pacific Fence
did so to specifications, and therefore was neither negligent,
nor acted wrongly nor breached its contract with Kiewit. On
September 16, 2010, the circuit court granted Pacific Fence’s
motion for partial summary judgment.
After ruling on multiple motions for partial summary
judgment with respect to the parties’ duties to defend, and in
light of the circuit court’s rulings on Coastal’s, KIC’s, and
11
Pacific Fence’s motions for partial summary judgment, the
circuit court’s allocation of the parties’ defense obligations
as reflected in the Amended Final Judgment are:
1) defense of DHHL, is jointly and severally owed by KIC,
Coastal, Kiewit, and Pacific Fence; wherein KIC’s obligation is
owed jointly and severally by Coastal and Kiewit; and wherein
any obligation of Kiewit is passed through to Pacific Fence;3
2) defense of KIC, is jointly and severally owed by Design
Partners, Sato, Coastal, Kiewit, and Pacific Fence; wherein
Kiewit’s obligation is passed through to Pacific Fence;
3) defense of Sato, which was tendered to and accepted by
Kiewit, is passed through to Pacific Fence.
With respect to KIC’s defense expenses, the court
apportioned costs among Kiewit, Coastal, Sato, Design Partners,
and Pacific Fence for various periods from December 1, 2005
through April 30, 2011, taking into consideration the various
dates of tenders of defense and relevant court orders. The
court did not apportion defense costs based on specific claims.
3
Pacific Fence prevailed on its appeal to the ICA with respect to any pass-
through duty to defend from Kiewit. In strictly construing the indemnity
provision in Pacific Fence’s subcontract with Kiewit, the ICA concluded that
it did not extend to Kiewit’s liability unless it arose at
least in part from Pacific Fence’s work under their
subcontract. . . . Pacific Fence’s alleged acts or
omissions, as set forth in Arthur’s Complaint,[*] were the
basis for its duties to defend itself as well as portions
of the defense of its contractors insofar as their
liabilities potentially arose from Pacific Fence’s acts or
omissions.
Arthur, 135 Hawaiʻi at 176, 346 P.3d at 245.
*The ICA is incorrect. To clarify, Pacific Fence was not named as a
defendant to the Arthurs’ claims in either the First or Second Amended
Complaints. Rather, Pacific Fence became a party to the litigation due to
Kiewit’s Fourth-party Complaint against it.
12
D. Appeal to the ICA
The various parties appealed the circuit court’s
Amended Final Judgment dated April 2, 2013, which encompassed
its various orders.4 Relevant here, Sato timely filed a Notice
of Cross-Appeal of the Amended Final Judgment filed pursuant to
the circuit court’s May 27, 2011 “Order Granting [KIC]’s Motion
for Partial Summary Judgment Against [Sato] and [Kiewit], and
For Enforcement of Order Granting Motion.” On June 4, 2013,
Sato’s Cross-Appeal was consolidated under CAAP-13-531.
Sato stated the following three points of error in its
Opening Brief:
1. It was error for the lower court to order that Sato
“had a joint and several duty to defend . . . KIC from
December 15, 2005”, and to enter judgment in accordance
therewith. . . .
2. It was error for the lower court to find that Sato was
obligated to pay KIC fees or costs in any amount or any
percentage or for any period, and to enter judgment in
accordance therewith. . . .
3. It was error for the lower court to enter judgment
finding that Sato had “a contractual duty to indemnify and
defend KIC,” and to enter a declaratory judgment in favor
of KIC and against Sato, jointly and severally, that Sato
“had a contractual, joint and several duty to defend KIC.”
Sato stated the circuit court erred in apportioning KIC’s
defense costs partly to Sato as the court should not have relied
on Pancakes in arriving at its decision because Pancakes was
“wrongly decided.” Sato argued that the Hold Harmless Clause
4
The Arthurs succeeded before the ICA with respect to their appeal of the
circuit court’s judgment entered in favor of AOAO, KIC, Sato, and Design
Partners as to their negligence claims. See Arthur, 135 Hawaiʻi at 167–68,
346 P.3d at 236–37. Thus, litigation in this matter continues.
13
should be strictly construed, and when so construed, (1) Sato
would not be liable for KIC’s defense costs until a finding of
liability against Sato with respect to the Arthurs’ claims, and
(2)
Sato’s indemnity obligations apply only to those claims
which “arise out of” its own wrongful conduct. All other
claims against KIC fall outside of Sato’s defense
obligation and the applicable indemnity provision. For
example, the once-asserted punitive damages claim against
KIC . . . is outside of Sato’s defense obligation because
it was premised on KIC’s own allegedly egregious conduct on
the Project.
Specifically, Sato asserted that HRS § 431:10-222, voids as
against public policy, “construction contracts that purport to
indemnify another for the other’s own negligence.” The statute
reads:
Construction industry; indemnity agreements invalid. Any
covenant, promise, agreement or understanding in, or in
connection with or collateral to, a contract or agreement
relative to the construction, alteration, repair or
maintenance of a building, structure, appurtenance or
appliance, including moving, demolition or excavation
connected therewith, purporting to indemnify the promisee
against liability for bodily injury to persons or damage to
property caused by or resulting from the sole negligence or
wilful misconduct of the promisee, the promisee’s agents or
employees, or indemnitee, is invalid as against public
policy, and is void and unenforceable; provided that this
section shall not affect any valid workers’ compensation
claim under chapter 386 or any other insurance contract or
agreement issued by an admitted insurer upon any insurable
interest under this code.
HRS § 431:10-222. Sato suggested that the circuit court’s
application of Pancakes “imposed large, potentially catastrophic
costs upon the smallest players in [a construction] project,
costs over which they have no ability to control by, e.g.[,] the
selection of counsel.”
14
KIC argued that Pancakes was not flawed and was
consistent with relevant case law. Moreover, it argued that HRS
§ 431:10-222 did not apply to Sato’s case, as the statute does
not refer to “professional design services” or to defense
obligations. KIC concluded by emphasizing that the “devastating
consequences” to Hawaii’s construction industry suggested by
Sato has not, and will not, occur as a result of applying
Pancakes to construction contracts as parties should have
appropriate insurance protection to cover both liability and
defense costs.
Upon re-examining Pancakes and the scope of a duty to
defend as compared to the scope of a duty to indemnify, the ICA
concluded:
Expanding an insurer’s duty to defend based on the
“complaint allegation rule” to general indemnity contracts
makes sense “because if the duty to defend was determined
only after the ultimate issue of liability on each claim
has been made, the case would be fully resolved before the
duty [to defend] was triggered, and there would be nothing
left to defend.” . . . .
In light of such reasoning and the lack of a
competing argument in Pancakes, we “discern[ed] no logical
reason why the duty to defend based on indemnity contracts
should not follow the same philosophy [of imposing a duty
to defend at the outset of litigation] used in the
insurance context.” . . . .
Once an indemnitor is found to have a duty to defend,
“[t]he indemnitor must bear the cost of a defense whenever
any of the claims asserted may potentially come within the
scope of an indemnity agreement, and the defense must
continue until it is clear that the liability cannot
possibly come within the scope of the indemnity.” Contrary
to Sato’s contention that its duty to defend would not be
triggered until wrongful conduct on the part of Sato “is
shown to have occurred, and be causally related to claims
asserted by [Arthur],” Sato’s duty to defend KIC was
triggered upon the filing of the complaint and/or the
15
tender of KIC’s defense to Sato and that duty encompassed
all claims that could potentially come within the scope of
the indemnity.
Arthur, 135 Hawaii at 170–71, 346 P.3d at 239–40 (citations
omitted) (brackets in original).
Moreover, in response to Sato’s argument that,
pursuant to HRS § 431:10-222 it was not required to defend
claims wholly unrelated to its actions, such as the Arthurs’
punitive damages claim raised solely against KIC in the Second
Amended Complaint, the ICA concluded:
HRS § 431:10-222 establishes that Sato could not be
held liable for the sole negligence or willful misconduct
of KIC, but it does not bar Sato’s duty to defend, and
possibly to indemnify, in this case because Sato, as well
as the other defendants were alleged to have been
negligent. Thus, this application of HRS § 431:10-222 does
not conflict with the circuit court’s determination (1)
that Sato’s duty to defend KIC includes all claims
potentially arising under the Sato Contract and not only
for those arising from Sato’s negligence or wilful
misconduct, and (2) as discussed in the prior section, that
Sato was liable for defense costs when KIC tendered its
defense rather than after a judicial determination of
Sato’s fault.
In sum, HRS § 431:10-222 restricts the scope of
indemnification provisions in construction contracts, but
it does not invalidate the application of the provision in
the Sato Contract to [the] Arthur[s’] claims here, and
Sato’s duty to ultimately indemnify KIC and/or others is
separate from its duty to defend. . . .
Id. at 241, 346 P.3d at 172.
E. Arguments before the Supreme Court
The arguments raised by Sato and KIC with respect to
Sato’s Application largely mirror the arguments the parties had
raised before the ICA. However, in supplemental briefing, the
parties raised additional points.
16
Sato asserted that the duty to indemnify and duty to
defend imposed by the Agreement were coextensive because the
duties were contained in one sentence. Sato also argued that
HRS § 431:10-222 is “clearly a remedial statute” and therefore
“must be liberally construed to effect its intended purpose.”
Sato reasoned that a liberal construction would mean that the
statute also banned promises to defend a promisee against
liability caused by the sole negligence of the promisee in a
construction contract.
Coastal emphasized that Pancakes inappropriately
treated commercial contracts and policies of liability insurance
similarly, when such agreements are markedly different. Among
the differences include “their respective contractual purposes”
and how indemnity provisions are construed in each type of
contract: in commercial contracts, indemnity provisions are
construed strictly against the indemnitee, whereas indemnity
provisions in insurance policies are liberally construed in
favor of the insured. Coastal echoed Sato’s argument that HRS §
431:10-222 should be liberally construed, and added that the
statute necessarily “precludes courts from determining the
existence of any duty to defend at the commencement of
litigation. . . . [as] [t]here would be no way of knowing
whether a defense will end up violating H.R.S. § 431:10-222.”
17
KIC argued that the duty to defend and the duty to
indemnify are “distinctly different matters,” and therefore are
not coextensive. KIC pointed out that this court cited to
Pancakes with approval in Haole v. State, 111 Hawaii 144, 140
P.3d 377 (2006), when considering the scope of a duty to defend
outlined in Hawaii Administrative Rules (“HAR”) § 19-41-7.5 KIC
reasoned: “By the foregoing, the Court endorsed the concept that
the duty to defend, outside the context of an insurance contract
but like an insurance contract, is not coextensive with the duty
to indemnify. Rather, the duty to defend is broader than the
duty to indemnify.” Lastly, KIC urged this court to focus on
the plain language of HRS § 431:10-222, which does not refer to
the duty to defend, as did the Court of Appeals of Massachusetts
when it was called upon to construe its state anti-indemnity
statute in Herson v. New Boston Garden Corp., 40 Mass. App. Ct.
779, 786–87, 667 N.E.2d 907, 914 (1996).
5
HAR § 19–41–7 provides:
Liability. Agencies, masters, owners, operators, or
charterers loading or unloading at state wharves shall
indemnify, defend, and save harmless the department, its
members, and employees from and against all losses, claims,
demands, and suits for damages, including death and
personal injury, and including costs and attorneys’ fees,
incident to or resulting from their operations on the
property of the department and the use of its facilities
except where the department has been proven to be solely
and legally negligent.
Haole, 111 Hawaii at 150, 947 P.2d at 383 (emphases removed).
18
III. Standard of Review
A. Interpretation of a Contract
“As a general rule, the construction and legal effect
to be given a contract is a question of law freely reviewable by
an appellate court.” Casumpang v. ILWU Local 142, 108 Hawaii
411, 420, 121 P.3d 391, 400 (2005) (citation omitted).
B. Interpretation of a Statute
“Interpretation of a statute is a question of law
which [is] review[ed] de novo.” Dupree v. Hiraga, 121 Hawaii
297, 312, 219 P.3d 1084, 1099 (2009) (citation omitted).
IV. Discussion
A. HRS § 431:10-222 Voids As Against Public Policy
Indemnification and Defense Clauses of a Promisee’s Sole
Negligence or Wilful Misconduct in Construction Contracts
HRS § 431:10-222 states in full:
Construction industry; indemnity agreements invalid. Any
covenant, promise, agreement or understanding in, or in
connection with or collateral to, a contract or agreement
relative to the construction, alteration, repair or
maintenance of a building, structure, appurtenance or
appliance, including moving, demolition or excavation
connected therewith, purporting to indemnify the promisee
against liability for bodily injury to persons or damage to
property caused by or resulting from the sole negligence or
wilful misconduct of the promisee, the promisee’s agents or
employees, or indemnitee, is invalid as against public
policy, and is void and unenforceable; provided that this
section shall not affect any valid workers’ compensation
claim under chapter 386 or any other insurance contract or
agreement issued by an admitted insurer upon any insurable
interest under this code.
The text of HRS § 431:10-222 is identical to its predecessor
statute, HRS § 431-453 (1985), when that statute was initially
19
introduced and passed, save for the removal of gendered terms
(e.g., replacing “workmen’s compensation” with “workers’
compensation,” and “his agents” with “the promisee’s agents”),
and the replacement of “chapter” with “code,” and deletion of
“however.” Compare HRS § 431:10-222, with 1970 Haw. Sess. Laws
Act 169 (“Act”), § 2 at 304–05, and H.B. 1925, 5th Leg., Reg.
Sess. (1970).
The legislature clearly stated its reasons for the
Act’s passage:
The purpose of this Act is to invalidate, as against public
policy, the prevalent practice in the construction industry
of causing contractors to assume liability for the
negligence of others by contract. Such so-called “hold
harmless” agreements are usually incorporated into
contracts for construction projects on a “take-it-or-leave-
it” basis; (i.e., to take out the necessary insurance or
leave the bidding to someone else), and frequently require
the contractor, engineer or architect, for example, to
undertake assumption of liability for personal injury or
property damage even where the same results from the “sole
negligence” of persons over whom the indemnitor has no
control or right of control. This practice is, and
precipitates further, a form of economic coercion by
placing contractors in the inequitable position of paying
prohibitive insurance premiums, which, if a small
contractor cannot afford, precludes him from performing
upon a project for which he is otherwise qualified, thereby
effectively disenfranchising him under a system of free
enterprise. In an economy in which the construction
industry contributes so significantly, this practice can
only be considered as contrary to the public interest.
This Act does not serve to relieve a contractor from
liability when he is negligent; but when he is not, it
places the responsibility for injury or damage where it
properly belongs, any promise of indemnification
notwithstanding.
Act 169, § 1 at 304. See also S. Stand. Comm. Rep. No. 962-70,
in 1970 Senate Journal, at 1441–42 (observing that “[a]s a
result [of then-industry practice], general contractors, in
20
order to protect themselves, are compelled to include similar
clauses in contracts with their subcontractors, and so forth.”).
Testimony submitted to the House Judiciary Committee from the
Board of Underwriters of Hawaii noted that the then-industry
practice “force[d] contractors to obtain broader insurance
coverage than they would normally need with resulting increased
costs in insurance premiums.” Board of Underwriters of Hawaii,
“Statement on Bill Relating to Declaring the Invalidity of
Certain Indemnity Agreements in the Construction Industry,” Mar.
19, 1970 (testifying in favor of H.B. 1925-70). Such increased
premiums for “broad form contractual liability insurance
[necessary to protect assets from uninsured losses caused by the
negligence of third parties] is at least 300-400% of the cost of
normal coverage.” H. Stand. Comm. Rep. No. 420-70, in 1970
House Journal, at 979 (quoting testimony submitted by an
insurance company executive who testified on behalf of the
Construction Industry Legislative Organization). The House
specifically elaborated upon the impact of the then-present
practice on Hawaii’s construction industry:
Your Committee is satisfied that this practice is, and
precipitates further, a form of economic coercion,
particularly in instances where the small contractor is
bidding in an open and highly competitive market involving
owners of substantial means, such that where there is a
wide disparity in bargaining power, it may be impossible
for the contractor to refuse to enter into a contract
containing such a provision, or, alternatively, even
precluding him from performing upon a project for which he
is otherwise qualified if he cannot afford the premium.
21
H. Stand. Comm. Rep. No. 420-70, in 1970 House Journal, at 979
(emphasis added). The House went on to reason:
Furthermore, it is apparent to your Committee that such
“hold harmless” clauses contribute, at least in part, to
the increasing costs of construction. In an economy in
which the construction industry contributes so
significantly this is a very real problem which can only be
remedied by legislative invalidation.
Id.
In sum, when enacting Act 169, the legislature was
plainly concerned with the prohibitive cost of insurance
policies to contractors — particularly, “small contractors,” and
subcontractors, and so forth — necessitated by the inclusion of
“hold harmless” clauses in their contracts with owners.6 Absent
its intervention, the legislature concluded that high insurance
premiums caused higher construction costs, which would
negatively impact Hawaii’s economy given that the construction
industry “contributes so significantly” to it. See id.
HRS § 431:10-222, and its predecessor, HRS § 431-453,
do not employ language prohibiting the imposition on contractors
of a contractual duty to defend owners. However, as a matter of
law, claims that fall outside the scope of contractual indemnity
do not trigger a promisor’s duty to defend. The framework of
6
This contrasts with the primary purpose of anti-indemnification statutes in
other states. See, e.g., 1800 Ocotillo, LLC v. WLB Group, Inc., 196 P.3d
222, 225 (Ariz. 2008) (“Anti-indemnification statutes are primarily intended
to prevent parties from eliminating their incentive to exercise due care.”)
(citation omitted).
22
the court’s analysis in Haole v. State, 111 Hawaii 144, 140 P.3d
377, illustrates this premise.7
In Haole, the court determined whether a duty to
defend imposed by Hawaii Administrative Rule § 19-41-7 was
lawful by first analyzing whether a duty to indemnify imposed by
the same regulation was valid. The court reasoned that even if
the duty to defend was triggered at the outset of litigation by
claims as alleged in the complaint (potentially rendering the
scope of the duty to defend larger than the duty to indemnify),
i.e., according to the “complaint allegation rule,” if HAR § 19-
41-7 was invalid as to imposing a duty to indemnify, then the
rule was also invalid as to imposing a duty to defend. See
Haole, 111 Hawaii at 151, 140 P.3d at 384 (“[U]nder the
‘complaint allegation rule,’ if there is no potential for
indemnification, then no duty to defend will arise.”).
In the same manner, because HRS § 431:10-222 voids as
against public policy indemnification clauses in construction
contracts between owners and contractors as to “liability for
bodily injury to persons or damage to property caused by or
resulting from the sole negligence or wilful misconduct of the
promisee, the promisee’s agents or employees, or indemnitee[s],”
7
In argument, KIC relied on Haole for the premise that this court had
“approved” Pancakes because Haole had cited to Pancakes. Nothing in Haole
supports this assertion.
23
HRS § 431:10-222 also operates to invalidate defense clauses for
that same subset of claims.8 In sum, pursuant to HRS § 431:10-
222, in the construction industry, a contractor is not
contractually liable for the sole negligence or wilful
misconduct of another, or for the defense thereof, as such
contractual requirements would cause higher insurance premiums
and greater construction costs, thereby harming Hawaii’s
economy.
Thus, to the extent the ICA’s opinion suggests
otherwise, we clarify that KIC’s defense costs associated with
defending against the Arthurs’ punitive damages claim must be
borne solely by KIC.
B. Pancakes, 85 Hawaiʻi 286, 944 P.2d 83 (App. 1997), Does Not
Apply to Defense Provisions in Construction Contracts
1. The Pancakes decision did not distinguish among non-
insurance indemnity contracts.
At issue in Pancakes was not a construction contract,
but rather a management and leasing agreement signed between
Pomare Properties Corporation (“Pomare”), a managing agent of
Lahaina Shopping Center, and Sofos Realty Corporation (“Sofos”),
that handled managing and leasing duties. Pancakes, 85 Hawaii
8
Moreover, we observe that as a practical matter, Act 169’s mitigation of
excessive insurance premiums would not be realized if the statute did not
similarly prohibit defense clauses — litigation costs can be substantial, and
insuring against such costs would likewise result in heightened premiums.
24
at 288, 944 P.2d at 85. The managing and leasing agreement
between Pomare and Sofos contained the following clause:
Any actions taken by [Sofos] pursuant to the terms of this
Agreement shall be done as agent of [Pomare Properties] and
all obligations or expenses incurred hereunder will be for
the account, on behalf of and at the expense of [Pomare
Properties], with [Pomare Properties’] prior review and
approval.
Further, except for the willful misconduct or gross
negligence of [Sofos], [Pomare Properties] shall indemnify,
defend and hold [Sofos] harmless from and against any and
all claims, demands, losses, liabilities and damages of
every kind and nature arising from any cause whatsoever
when [Sofos] is acting under this Agreement or the
instructions of [Pomare Properties] or its designated
representative. . . .
Id. at 289 n.2, 944 P.2d at 86 n.2 (“Responsibility Clause”)
(alterations in original).
In an effort to fill the shopping center with tenants,
Lee Carter (“Carter”), a real estate salesperson working for
Sofos, contacted the president of Pancakes of Hawaii, Inc.
(“Pancakes”). According to Pancakes, Carter represented that
the center would soon reach an eighty to eighty-five percent
occupancy level. After several months of negotiations, Pancakes
entered into a lease agreement with Pomare in June 1990, built
and opened a restaurant by September 1991, and ultimately closed
the restaurant in December 1991 after suffering huge financial
losses due to a lack of foot traffic through the mall as the
shopping center was less than thirty-five percent occupied.
Pancakes brought suit against the lessee of the shopping center,
James Romig (“Romig”), Pomare, and Sofos, alleging fraud,
25
intentional and/or negligent misrepresentation, and breach of
the covenant of good faith and fair dealing against all
defendants; breach of contract against Romig and Pomare; and
professional negligence against Sofos. See id. at 288–89, 944
P.2d at 85–86.
Sofos tendered the defense of the action to Pomare
based on the Responsibility Clause. Pomare rejected the tender
and Sofos filed a cross-claim against Pomare, demanding that
Pomare honor the Responsibility Clause. See id. at 289, 944
P.2d at 86. The trial court ultimately ordered Pomare to defend
Sofos against Pancakes’s claims, and held Pomare liable for one-
half of accrued attorney’s fees and costs. See id. at 289–90,
944 P.2d at 86–87. Pomare subsequently filed a motion for
reconsideration on the issue, stating that it had reached a
settlement with Pancakes, dismissing all claims except the fraud
and misrepresentation claims against Sofos. Accordingly, Pomare
argued that the remaining claims were not covered under the
Responsibility Clause and therefore Pomare’s duty to defend
Sofos was extinguished. The trial court denied Pomare’s motion,
stating that a fully executed agreement had not been submitted
to the court, leaving “too many unanswered questions.” Id. at
290, 944 P.2d at 87 (brackets omitted). Sofos ultimately
succeeded in defeating Pancakes’s claims. Upon entry of
26
judgment, Pomare filed a timely appeal on the issue of its duty
to defend Sofos. See id.
On appeal, the ICA made the following determinations
as to the scope of the duty to defend as presented in non-
insurance indemnity contracts.
First, the ICA noted that the duty to defend as
presented in insurance contracts is “fairly broad and separate
and distinct from the duty to indemnify.” Id. at 291, 944 P.2d
at 88. The “complaint allegation rule” is followed with respect
to these contracts, i.e., “where a suit raises a potential for
indemnification liability of the insurer to the insured, the
insurer has a duty to accept the defense of the entire suit even
though other claims of the complaint fall outside the policy’s
coverage.” Id. (quoting Hawaiian Holiday Macadamia Nut Co. v.
Industrial Indem. Co., 76 Hawaii 166, 169, 872 P.2d 230, 233
(1994)). The ICA then acknowledged that “Hawaii has not yet
expanded the insurer’s duty to defend based on the complaint
allegation rule to non-insurance indemnity contracts,” but that
it could “discern no logical reason why the duty to defend based
on indemnity contracts should not follow the same philosophy
used in the insurance context.” Id. at 291–92, 944 P.2d at 88–
89. The ICA noted that “[a] number of jurisdictions have freely
imported the common law reasoning from insurance cases to
27
contractual indemnity cases.” Id. at 292, 944 P.2d at 89 (cases
cited).
Finally, the ICA concluded:
The duty to defend, to have any effect at all, must be
determined when the complaint is filed. Otherwise, an
indemnitor can simply refuse to [accept a] tender [of]
defense whenever a suit alleges claims that are not covered
by the indemnity provision. This kind of result would
defeat the purpose of a duty to defend provision by forcing
the indemnitee to shoulder the entire cost of defending
suits that raise the potential for indemnification.
In our opinion, the procedure used to determine the
duty to defend based on indemnity contracts can follow the
same procedure used in the insurance context. If a
complaint alleges claims that fall within the coverage of
the indemnity provision, then, according to the complaint
allegation rule, the duty to defend begins. This is
separate and distinct from the duty to indemnify. Once the
trier of fact makes a determination on the claims in the
lawsuit, the duty to indemnify will either arise or lie
dormant. Claims falling within the indemnity provision
will trigger the duty to indemnify, while claims falling
outside the provision will relieve the indemnitor of his or
her duty to indemnify. In our view, this is the only
equitable interpretation that gives life to non-insurance
indemnity clauses and prevents indemnitors from benumbing
the duty to defend until after a case has been litigated.
Id. In applying this legal framework to Pomare’s appeal, the
ICA held that Pomare’s duty to defend arose when Pancakes filed
its initial complaint because Pancakes made at least some claims
that fell within the scope of the Responsibility Clause, and
Sofos’s conduct fell within the purview of the management and
leasing agreement. See id. at 295, 944 P.2d at 92.
2. Pancakes does not apply to construction contracts.
HRS § 431:10-222 makes clear that the legislature does
not view all non-insurance indemnity contracts the same.
Rather, as a matter of public policy, the legislature
28
statutorily limited the enforceable terms in construction
contracts, as promises to indemnify or defend “the promisee
against liability for bodily injury to persons or damage to
property caused by or resulting from the sole negligence or
wilful misconduct of the promisee, the promisee’s agents or
employees, or indemnitee” are voided by HRS § 431:10-222.
Accordingly, the holding in Pancakes does not apply to
this case.9 In Pancakes, the court applied the complaint
allegation rule to the management and leasing agreement between
Sofos and Pomare after it “discern[ed] no logical reason why the
duty to defend based on indemnity contracts should not follow
the same philosophy used in the insurance context.” Pancakes,
85 Hawaii at 291–92, 944 P.2d at 88–89. Here, however, there is
a cogent reason why a construction contract’s duty to defend
should not necessarily follow insurance law: HRS § 431:10-222
and the legislature’s express intent that each party to a
construction contract be responsible for its “sole negligence or
wilful misconduct.”
C. The Scope of a Promisor’s Duty to Defend That Is Imposed by
a Construction Contract Is Determined at the End of
Litigation
HRS § 431:10-222 does not expressly provide whether a
contractual duty to defend (outside the prohibited bounds of HRS
9
We do not, and need not, determine whether Pancakes is applicable to all
non-insurance indemnity contracts.
29
§ 431:10-222) is determined at the outset of litigation based on
the complaint allegation rule, or whether it is determined at
the culmination of litigation based only on meritorious claims.
It clearly prohibits, however, a promisor in a construction
contract from being contractually required to defend a promisee
against “liability for bodily injury to persons or damage to
property caused by or resulting from the sole negligence or
wilful misconduct of the promisee, the promisee’s agents or
employees, or indemnitee.” See HRS § 431:10-222; Part IV.A.
Thus, if the complaint allegation rule were to apply, it is
possible in a case where initial allegations were brought
against multiple parties, for example, that a promisor would be
compelled to defend a promisee against negligence claims where
ultimate liability is attributed solely to the promisee. Such a
result contravenes HRS § 431:10-222 and our caselaw holding that
“contracts of indemnity are [to be] strictly construed” against
the indemnitee. Kamali v. Hawaiian Elec. Co., 54 Haw. 153, 161,
504 P.2d 861, 866 (1972).
As such, we hold that with respect to a duty to defend
in a construction contract, the scope of a promisor’s duty to
defend is determined at the end of litigation. HRS § 431:10-222
effectively renders coextensive the duties to indemnify and
defend in construction contracts.
30
V. Conclusion
For the foregoing reasons, we vacate the ICA’s June 8,
2015 Judgment on Appeal entered pursuant to its February 27,
2015 Opinion, and remand this matter to the circuit court for
further proceedings consistent with this opinion.
Kevin P.H. Sumida /s/ Mark E. Recktenwald
for petitioners, Sato and
Associates, Inc. and Daniel /s/ Sabrina S. McKenna
S. Miyasato
/s/ Richard W. Pollack
Brad S. Petrus
for respondent, Kamehameha /s/ Michael D. Wilson
Investment Corporation
/s/ R. Mark Browning
Michiro Iwanaga and
Wayne M. Sakai
for respondent, Coastal
Construction Co., Inc.
31